<PAGE>
PAGE 1
- ---------------------------------------------------------
KEYSTONE INTERNATIONAL FUND INC.
Dear Shareholders:
It often seems that when international investment
diversification makes the most intellectual sense, it makes the
least emotional sense.
Like many international and global funds, the Keystone
International Fund has provided positive returns during the
past year. However, the returns for the 12 months that ended on
October 31, 1997 were held back by the market setbacks during
October when several Asian currencies were devalued and local
stock markets suffered severe losses. As a result of both this
volatility and the positive investment environment in the
United States, most domestic equity funds showed superior
returns for the period.
It is easy to see why some mutual fund shareholders might
question the value of investing in an international fund. It
just seems more comfortable to invest in large U.S. companies,
which have been the market leaders for the past three years.
(Photo of William M.
Ennis appears here)
WILLIAM M. ENNIS
THE ADVANTAGES OF DIVERSIFICATION
The answer is simple. Over the longer term, international diversification of
part of one's investment portfolio can enhance returns and reduce volatility.
The United States stock market has had a wonderful rally for the past three
years. However, looking at present prices, many investment professionals see
more attractive values in the international markets that have been lagging the
U.S. market. In addition, the very large American companies, whose stocks have
been the best performers, may be less able to increase their future earnings by
the restructuring programs that have been helping them. Their ability to export
also is weakened by the strong U.S. dollar. Meanwhile, very similar
restructuring and cost-cutting proposals are just beginning to take hold among
corporations in Europe and Japan.
At Evergreen Funds, we encourage you to remain focused on your long-term goals
and to remain disciplined in your personal investment strategies. No one can
confidently say whether next year's market will follow last year's pattern, or
whether trends will reverse themselves so that last year's lagging strategy
becomes next year's winning strategy. We can say, however, that the most likely
winners in the long run are those who consistently follow long-term investment
strategies.
UPCOMING DEVELOPMENTS
In the next few weeks and months, shareholders of Evergreen and Keystone funds
will begin to notice some changes. The Evergreen Keystone Funds are becoming the
Evergreen Funds. On October 31, 1997 Keystone America Funds adopted the name of
Evergreen and in early 1998 the original Keystone Fund Family, including
Keystone International Fund, will take the Evergreen name.
We believe that by putting all the funds under the umbrella name of Evergreen
Funds we will be creating a simpler and more cohesive image. Importantly, we
expect to create substantial cost savings for shareholders as a result of
consolidating prospectuses, annual reports, legal registrations and other
materials. It also will be easier for you to find all the funds of the Evergreen
Family, to which you have exchange privileges, under one heading in newspapers
and electronic services.
-- CONTINUED--
<PAGE>
PAGE 2
- ---------------------------------------------------------
KEYSTONE INTERNATIONAL FUND INC.
What will not change will be our commitment to provide you with the finest
investment products and shareholder services possible.
If you should have any questions about these changes or other issues affecting
your investments, we encourage you to consult your financial adviser or call
Evergreen Funds at 1-800-343-2898.
Sincerely,
/s/ William M. Ennis
William M. Ennis
MANAGING DIRECTOR
<PAGE>
PAGE 3
- ---------------------------------------------------------
A Discussion With
Your Fund Manager
GILMAN GUNN IS THE SENIOR VICE PRESIDENT AND CHIEF INVESTMENT OFFICER OF
INTERNATIONAL INVESTMENTS AT KEYSTONE INVESTMENT MANAGEMENT COMPANY, WITH
MORE THAN 24 YEARS OF EXPERIENCE.
Q GILMAN, HOW WOULD YOU DESCRIBE THE PERFORMANCE OF THE FUND DURING THE PAST
YEAR?
A I think the Fund has performed quite well. For the 12 months that ended on
October 31, 1997, Keystone International Fund had a total return of 15.69%,
outperforming its benchmark, the Morgan Stanley Capital International EAFE
Index, which had a return of 4.63%. The EAFE Index measures performance of
stocks in Europe, Australia and the Far East.
Q WHAT CONTRIBUTED TO THIS STRONG, RELATIVE PERFORMANCE?
A There were several factors. First, during a period of strength by the U.S.
dollar, we hedged part of our foreign currency exposure. This strategy has been
successful in adding to the performance of the Fund. Second, we had a heavy
emphasis on Europe throughout the year. At the end of the fiscal year, the
Fund's weighting in Europe was approximately 60% of net assets. In general the
European markets have increased by 15% to 40% during the 12 month period in
local terms, although these local returns were mitigated by the fall of the
currencies against the U.S. dollar. Third, we have kept our exposure in Japan
and the Far East very moderate. Our emphasis on emerging markets, in general,
has been very light, less than 10%, throughout the year. Earlier in the year, we
did have larger weightings in Latin America, and this did help the performance
of the Fund.
Q WHY HAS EUROPE BEEN SUCH A RELATIVELY STRONG PERFORMER?
A Europe has presented good investment opportunities for several reasons. First,
the weaker European currencies have helped European exporters become more
competitive against U.S. companies. Second, lower interest rates have been good
for European companies. Third, many European companies have started
restructuring and cost-cutting programs, and these restructurings have added to
the bottom line, even in a period of flat economic growth. Fourth, there has
been a major portfolio shift in Europe, as people have moved out of cash and
bonds and into equities, and this shift has helped the European equity markets.
Q JAPAN IS THE WORLD'S SECOND LARGEST MARKET, AND YET THE FUND'S WEIGHTING IN
JAPAN HAS BEEN REDUCED FROM ABOUT 20% OF ASSETS TO LESS THAN 7%. WHY IS THAT?
A Japan continues to be very disappointing. In general, we have wanted to keep
our exposure light. We have invested in some major Japanese exporters, and the
weak yen and strong dollar have helped these investments. One major holding that
has been a very strong performer is Sony Corp. We also have invested in some
Japanese pharmaceutical companies and property and casualty companies.
There are some good things happening in Japan. Interest rates are very low,
and the financial system is slowly improving. But the overall market has been
hurt throughout the year by the lack of domestic growth, and more recently by
the fallout from the Asian problems.
<PAGE>
PAGE 4
- ---------------------------------------------------------
KEYSTONE INTERNATIONAL FUND INC.
We expect we will be keeping our exposure to the Japanese market fairly light.
We are very lightly weighted, and have been lightly weighted, in Southeast
Asia and Asia. We think Asia will continue to be a volatile area. There are
longer-term structural problems that need to be addressed.
Q WHAT INDUSTRIES HAVE YOU BEEN EMPHASIZING?
A We have tended to be conservative. Several of the industries we have
emphasized have been fairly defensive in nature. These include pharmaceuticals,
healthcare, food and beverages, and energy. We have been underweighted in
technology and Japanese banks.
Q WHAT ARE SOME OF THE COMPANIES THAT HAVE CONTRIBUTED TO THE PERFORMANCE?
A Some of our best investments have been global companies with strong
franchises. Many of them also have been restructuring to increase their
efficiency and competitiveness.
Philips Electronics NV, a Dutch company that is the Fund's third largest
holding, is a good example of a company that is benefitting from restructuring,
cutting costs and getting out of its non-core businesses. This is also a company
that has a very large market share in its primary businesses. It is dominant in
Europe.
Other companies that have helped the fund include the largest holding, Nestle
SA, which is prominent globally; British Petroleum Co. Plc, which has been
restructuring; Societe Nationale Elf Aquitaine of France, another large oil
company that is benefitting from restructuring; and Novartis AG, our largest
pharmaceutical company.
One very strong performer has been Holderbank Financiere Glarus AG, a Swiss
company. This corporation owns cement companies all over the world, particularly
in emerging markets, and is very well run. The cement industry is becoming more
consolidated, with fewer players, and a few are becoming dominant; therefore,
pricing is becoming easier for them.
All these companies have been top ten holdings, so their performance has
helped the Fund.
Q GILMAN, THE UNITED STATES STOCK MARKET HAS OUTPERFORMED FOREIGN MARKETS FOR
THE PAST SEVERAL YEARS. WHY DOES IT STILL MAKE SENSE TO INVEST INTERNATIONALLY,
ESPECIALLY IN LIGHT OF THE VOLATILITY OF FOREIGN MARKETS?
A Volatility is not limited to outside the United States. There are many people
who think the U.S. market is highly valued after significantly outperforming the
rest of the world markets over the past several years. U.S. corporations have
significantly benefitted during the past few years from cost-cuttings and
restructurings. This trend just started over the last two years in Europe and is
only just beginning in Japan. As a result, looking ahead, there will be more
investment opportunities from restructuring outside the United States than
inside. In addition, the strength of the U.S. dollar will make it more difficult
for U.S. exporters to compete in the international markets, while foreign
exporters should have an easier time. Finally, outside the United States there
are many opportunities that did not exist within the United States. One example
is privatization.
It is true that markets outside the United States can be more volatile. We
have tried to be cognizant of the risks as we've invested, and this awareness
has helped the fund achieve competitive performance with below-average risk.
Q GILMAN, WHAT IS YOUR OUTLOOK?
A We see opportunities, particularly in Europe where economies are growing,
interest rates are low, and corporations are restructuring to increase their
efficiency and competitiveness. We have about half the Fund's assets in Europe,
and we expect this emphasis to continue. We are less optimistic about the
near-term opportunities in Japan and Asia, and we expect to keep our weightings
modest in those regions, concentrating on selective opportunities, such as
Japanese exporters
<PAGE>
PAGE 5
- ---------------------------------------------------------
that have been helped by the strength of the U.S. dollar. We also expect to keep
a fairly modest weighting in the emerging markets, less than 10%, although we
will be available to take advantage of selective opportunities.
We have been very mindful of the recent volatility in the emerging markets,
and we expect to have light weightings there. Our relatively large cash
weighting, at about 22% at the end of the fiscal year, as well as active
currency management should help reduce the risk of the Fund. We believe there
are some very attractive opportunities in international investing, and it makes
more sense than ever to have part of one's portfolio diversified
internationally.
TOP 10 HOLDINGS
AS OF OCTOBER 31, 1997 AS A PERCENTAGE OF NET ASSETS
<TABLE>
<S> <C>
Nestle SA (Switzerland) 2.7%
- ---------------------------------------------------------
Novartis AG (Switzerland) 2.6%
- ---------------------------------------------------------
Philips Electronics NV (Netherlands) 2.4%
- ---------------------------------------------------------
British Petroleum Co. Plc (U.K.) 2.3%
- ---------------------------------------------------------
Karstadt AG (Germany) 2.1%
- ---------------------------------------------------------
Societe Nationale Elf Aquitaine (France) 2.1%
- ---------------------------------------------------------
Holderbank Financiere Glarus AG (Switzerland) 2.0%
- ---------------------------------------------------------
B.A.T. Industries Plc (U.K.) 1.9%
- ---------------------------------------------------------
Sony Corp. (Japan) 1.8%
- ---------------------------------------------------------
Telecom Italia SpA (Italy) 1.7%
- ---------------------------------------------------------
</TABLE>
<PAGE>
PAGE 6
- ---------------------------------------------------------
KEYSTONE INTERNATIONAL FUND INC.
Growth of an Investment
[Graph appears below with the following information:]
Growth of an investment in
Keystone International Fund Inc.
October 31, 1987 through October 31, 1997
Initial Dividend
Investment Reinvestment
---------- ------------
(In Thousands)
10/31/87 10,000 10,000
10/89 9,423 11,477
10/91 7,811 10,465
10/93 9,581 13,440
10/95 9,318 14,656
10/97 11,337 18,731
A $10,000 investment in Keystone International Fund Inc. made on October 31,
1987 with all distributions reinvested was worth $18,731 on October 31, 1997.
Past performance is no guarantee of future results.
<TABLE>
<CAPTION>
HISTORICAL PERFORMANCE AS OF OCTOBER 31, 1997
<S> <C>
- ----------------------------------------------------------
<CAPTION>
CUMULATIVE TOTAL RETURN
<S> <C>
1 year w/o sales charge 15.69%
1 year w/sales charge* 12.69%
5 years 72.94%
10 years 87.31%
AVERAGE ANNUAL TOTAL RETURN
1 year w/o sales charge 15.69%
1 year w/sales charge* 12.69%
5 years 11.58%
10 years 6.48%
</TABLE>
*ADJUSTED FOR MAXIMUM CONTINGENT DEFERRED SALES CHARGE OF 3.0% FOR THOSE
INVESTORS WHO SOLD FUND SHARES AFTER ONE CALENDAR YEAR.
INTERNATIONAL INVESTING INVOLVES INCREASED RISK AND VOLATILITY.
[Graph appears below with the following information:]
Comparison of a change in value of a $10,000 investment in Keystone
International Fund Inc., the Morgan Stanley Europe, Australia, and Far East
Index and the Consumer Price Index.
Initial
Investment Fund CPI MS EAFE
- ---------- ------ ------ --------
(In Thousands)
10/87 10,000 10,000 10,000
10/89 11,477 10,895 13,503
10/91 10,465 11,919 12,182
10/93 13,440 12,637 14,018
10/95 14,656 13,332 14,915
10/97 18,731 14,001 16,714
Past performance is no guarantee of future results. The one-year return reflects
the deduction of the Fund's 3% contingent deferred sales charge for the shares
held for at least one year.
<PAGE>
PAGE 7
- ---------------------------------------------------------
SCHEDULE OF INVESTMENTS-- OCTOBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------
COMMON STOCKS-- 77.4%
<S> <C> <C> <C>
ARGENTINA-- 0.0%
HOLDING COMPANIES-- 0.0%
5,000 CEI Citicorp Holdings SA...... $ 20,012
------------
AUSTRALIA-- 2.8%
BANKS-- 1.0%
116,000 National Australia Bank
Ltd......................... 1,586,673
------------
FINANCE & INSURANCE-- 0.4%
44,500 QBE Insurance Group Ltd....... 208,109
11,125 QBE Insurance Group Ltd.,
Bonus Shares................ 50,697
181,500 Tyndall Australia Ltd......... 292,296
------------
551,102
------------
FOOD & BEVERAGE
PRODUCTS-- 0.2%
162,000 Fosters Brewing Group Ltd..... 307,602
------------
HEALTHCARE PRODUCTS &
SERVICES-- 0.8%
1,128,887 Sonic Healthcare Ltd.......... 1,190,835
------------
MACHINERY-- DIVERSIFIED-- 0.2%
108,500 Evans Deakin Industries
Ltd......................... 285,372
------------
MANUFACTURING-- DISTRIBUTING-- 0.2%
45,937 Siddons Ramset Ltd............ 229,367
------------
TOTAL AUSTRALIA............... 4,150,951
------------
BRAZIL-- 0.6%
MACHINERY-- DIVERSIFIED-- 0.0%
21,900,000 Avipal SA..................... 67,540
------------
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 0.6%
41,316 Compania Riograndense de
Telecommunica, Receipts..... 31,855
8,400 Telecomunicacoes Brasileiras,
ADR......................... 852,600
------------
884,455
------------
TOTAL BRAZIL.................. 951,995
------------
CANADA-- 5.1%
BANKS-- 1.4%
147,900 National Bank of Canada....... 2,104,087
------------
CHEMICAL & AGRICULTURAL
PRODUCTS-- 1.0%
19,280 Potash Corp. of Saskatchewan,
Inc......................... 1,573,892
------------
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
CANADA-- CONTINUED
DIVERSIFIED COMPANIES-- 0.3%
13,600 Power Corp. of Canada......... $ 403,363
------------
FINANCE & INSURANCE-- 0.8%
2,000 * BRL Enterprises Inc........... 7,095
49,100 Onex Corp..................... 1,297,744
------------
1,304,839
------------
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 1.6%
112,705 Quebecor Inc., Class B........ 2,399,085
------------
TOTAL CANADA.................. 7,785,266
------------
FRANCE-- 7.6%
ADVERTISING & RELATED
SERVICES-- 0.1%
3,100 Dauphin O.T.A................. 214,970
------------
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 0.3%
8,383 Michelin...................... 430,032
------------
BANKS-- 0.8%
20,353 Credit Commerce de France..... 1,153,098
------------
BUILDING PRODUCTS-- 0.6%
13,867 Lafarge....................... 866,410
------------
BUSINESS EQUIPMENT &
SERVICES-- 0.3%
4,000 * ATOS SA....................... 449,356
------------
ELECTRICAL EQUIPMENT &
SERVICES-- 0.2%
1,050 Le Carbone Lorraine........... 278,507
------------
ENERGY-- 2.0%
25,190 Societe Nationale Elf
Aquitaine................... 3,118,044
------------
FINANCE & INSURANCE-- 2.4%
23,900 AXA-UAP....................... 1,636,632
4,829 Societe Eurafrance SA......... 1,966,510
------------
3,603,142
------------
HEALTHCARE PRODUCTS &
SERVICES-- 0.8%
26,759 Rhone Poulenc SA.............. 1,166,712
------------
LEISURE & TOURISM-- 0.1%
1,100 Zodiac SA..................... 220,830
------------
TOTAL FRANCE.................. 11,501,101
------------
</TABLE>
<PAGE>
PAGE 8
- ---------------------------------------------------------
KEYSTONE INTERNATIONAL FUND INC.
SCHEDULE OF INVESTMENTS-- OCTOBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
GERMANY-- 4.1%
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 0.6%
12,600 Daimler-Benz AG............... $ 844,239
------------
ELECTRICAL EQUIPMENT &
SERVICES-- 0.3%
23,400 Berliner Kraft & Licht AG..... 530,769
------------
HEALTHCARE PRODUCTS &
SERVICES-- 0.4%
17,700 Hoechst AG.................... 673,582
------------
MACHINERY-- DIVERSIFIED-- 0.2%
7,970 Boewe Systec AG............... 235,799
------------
PAPER & PACKAGING-- 0.5%
3,700 Schmalbach Lubeca AG.......... 686,855
------------
RETAILING & WHOLESALE-- 2.1%
9,240 Karstadt AG................... 3,216,150
------------
TOTAL GERMANY................. 6,187,394
------------
HONG KONG-- 0.0%
FINANCE & INSURANCE-- 0.0%
77 HSBC Holdings Plc............. 1,743
------------
LEISURE & TOURISM-- 0.0%
400 Regal Hotels International
Holdings Ltd................ 75
------------
TOTAL HONG KONG............... 1,818
------------
INDIA-- 0.6%
TEXTILE & APPAREL-- 0.6%
11,000 * Reliance Industries Ltd.,
GDS......................... 231,000
33,000 Reliance Industries Ltd., GDR,
144A........................ 693,000
------------
924,000
------------
TOTAL INDIA................... 924,000
------------
ITALY-- 3.1%
HOUSEHOLD PRODUCTS &
SERVICES-- 0.6%
40,500 Industrie Natuzzi SpA ADS..... 906,188
------------
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 2.5%
315,000 Telecom Italia Mobile SpA..... 1,168,458
421,666 Telecom Italia SpA............ 2,642,573
------------
3,811,031
------------
TOTAL ITALY................... 4,717,219
------------
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
JAPAN-- 6.3%
CHEMICAL & AGRICULTURAL
PRODUCTS-- 0.2%
40,000 Sanyo Chemical Industries..... $ 317,407
------------
FINANCE & INSURANCE-- 0.4%
5,900 * Nichiei Co.................... 647,113
------------
FOOD & BEVERAGE
PRODUCTS-- 0.0%
200 Kirin Brewery Co.............. 1,678
------------
HEALTHCARE PRODUCTS &
SERVICES-- 2.0%
73,000 Taisho Pharmaceutical Co...... 1,868,218
74,000 Terumo Corp................... 1,217,449
------------
3,085,667
------------
HOUSEHOLD PRODUCTS &
SERVICES-- 1.8%
32,500 Sony Corp..................... 2,697,756
------------
LEISURE & TOURISM-- 0.7%
31,000 Fuji Photo Film Co............ 1,123,058
------------
OFFICE EQUIPMENT &
SUPPLIES-- 0.6%
76,000 Fujitsu Ltd................... 833,569
------------
TIRES & RUBBER-- 0.6%
42,000 Bridgestone Corp.............. 907,353
------------
TOTAL JAPAN................... 9,613,601
------------
MEXICO-- 0.0%
BANKS-- 0.0%
15,600 * Grupo Finance Banamex Accival
SA de CV, Series B.......... 30,884
------------
NETHERLANDS-- 8.1%
ADVERTISING & RELATED
SERVICES-- 0.6%
40,000 Telegraaf NV.................. 824,105
------------
BUILDING, CONSTRUCTION &
FURNISHINGS-- 0.8%
69,200 Boskalis Westminster.......... 1,172,640
------------
DIVERSIFIED COMPANIES-- 0.5%
15,196 Unilever NV................... 807,740
------------
ENGINEERING-- 0.3%
14,480 Fugro NV...................... 510,883
------------
FINANCE & INSURANCE-- 1.4%
26,920 AEGON NV...................... 2,121,432
------------
</TABLE>
<PAGE>
PAGE 9
- ---------------------------------------------------------
SCHEDULE OF INVESTMENTS-- OCTOBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
NETHERLANDS-- CONTINUED
FOOD & BEVERAGE PRODUCTS-- 0.3%
16,710 Ahold Kon NV.................. $ 427,755
------------
HOUSEHOLD PRODUCTS &
SERVICES-- 2.4%
47,195 Philips Electronics NV........ 3,694,896
------------
OIL / ENERGY-- 1.1%
32,395 Royal Dutch Petroleum......... 1,713,606
------------
TRANSPORTATION-- 0.7%
27,100 Van Ommeren Kon NV............ 970,101
------------
TOTAL NETHERLANDS............. 12,243,158
------------
SOUTH AFRICA-- 3.3%
FINANCE & INSURANCE-- 1.0%
43,725 Liberty Life Association of
Africa, Ltd................. 1,090,286
29,500 Richemont Securities AG....... 347,563
------------
1,437,849
------------
FOOD & BEVERAGE PRODUCTS-- 0.8%
155,000 Premier Group................. 170,701
41,625 South Africa Brews............ 1,107,117
------------
1,277,818
------------
GOLD MINING-- 0.1%
16,900 Johnnies Industrial Corp.
Ltd......................... 189,631
------------
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 0.4%
66,500 Nasionale Pers Beperk......... 635,637
------------
RETAILING & WHOLESALE-- 1.0%
110,200 JD Group Ltd.................. 739,628
531,150 New Clicks Holdings........... 695,324
------------
1,434,952
------------
TOTAL SOUTH AFRICA............ 4,975,887
------------
SPAIN-- 1.7%
BANKS-- 0.9%
47,400 BCO Santander................. 1,327,799
------------
ENERGY-- 0.8%
30,650 Repsol SA..................... 1,285,248
------------
TOTAL SPAIN................... 2,613,047
------------
SWEDEN-- 6.9%
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 1.2%
73,000 Volvo AB...................... 1,910,306
------------
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
SWEDEN-- CONTINUED
BUILDING, CONSTRUCTION &
FURNISHINGS-- 1.6%
85,800 Assa Abloy.................... $ 1,958,878
164,700 * Swedish Match Co.............. 505,761
------------
2,464,639
------------
HEALTHCARE PRODUCTS &
SERVICES-- 2.6%
115,382 Astra AB...................... 1,864,006
41,600 Getinge Industrier............ 716,485
41,487 Pharmacia & Upjohn............ 1,321,066
------------
3,901,557
------------
HOUSEHOLD PRODUCTS &
SERVICES-- 1.3%
23,600 Electrolux AB, Series B....... 1,953,564
------------
METAL PRODUCTS &
SERVICES-- 0.2%
16,750 * Granges AB.................... 273,952
------------
TOTAL SWEDEN.................. 10,504,018
------------
SWITZERLAND-- 8.9%
BUILDING, CONSTRUCTION &
FURNISHINGS-- 2.0%
3,805 Holderbank Financiere Glarus
AG.......................... 3,062,478
------------
BUSINESS EQUIPMENT &
SERVICES-- 1.3%
1,005 SGS Holding................... 1,937,869
------------
FINANCE & INSURANCE-- 0.3%
350 Compagnie Financiere Richemont
AG.......................... 424,924
------------
FOOD & BEVERAGE PRODUCTS-- 2.7%
2,931 Nestle SA..................... 4,129,879
------------
HEALTHCARE PRODUCTS &
SERVICES-- 2.6%
1,722 Novartis AG................... 2,715,355
806 Novartis AG, Registered
Shares...................... 1,262,316
------------
3,977,671
------------
TOTAL SWITZERLAND............. 13,532,821
------------
TURKEY-- 3.7%
BANKS-- 0.7%
15,521,000 Akbank Turk Anonim Sirket..... 1,056,828
------------
FINANCE & INSURANCE-- 0.9%
22,025,000 * Haci Omer Sabanci............. 1,283,732
------------
</TABLE>
<PAGE>
PAGE 10
- ---------------------------------------------------------
KEYSTONE INTERNATIONAL FUND INC.
SCHEDULE OF INVESTMENTS-- OCTOBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
TURKEY-- CONTINUED
FOOD & BEVERAGE PRODUCTS-- 0.7%
4,385,000 Erciyas Biracilik Ve Malt..... $ 621,037
6,679,000 Guney Biracilik............... 491,157
------------
1,112,194
------------
HOUSEHOLD PRODUCTS &
SERVICES-- 0.9%
12,489,500 Arcelik AS.................... 1,394,677
------------
INDUSTRIAL SPECIALTY PRODUCTS
& SERVICES-- 0.5%
8,925,000 * Turk Sise ve Cam Fabrikalari
AS.......................... 765,708
------------
TOTAL TURKEY.................. 5,613,139
------------
UNITED KINGDOM-- 14.6%
ADVERTISING & RELATED
SERVICES-- 1.1%
132,000 Pearson Publishing Plc........ 1,727,412
------------
DIVERSIFIED COMPANIES-- 1.9%
605,684 Lonrho Plc.................... 995,863
238,500 Morgan Crucible Company Plc... 1,940,697
------------
2,936,560
------------
ENERGY-- 2.3%
236,082 British Petroleum Co. Plc..... 3,469,721
------------
FOOD & BEVERAGE PRODUCTS-- 3.0%
337,686 B.A.T Industries Plc.......... 2,954,574
170,891 Guinness Plc.................. 1,528,178
------------
4,482,752
------------
HEALTHCARE PRODUCTS &
SERVICES-- 0.9%
63,500 Glaxo Wellcome Plc............ 1,361,545
------------
INDUSTRIAL SPECIALTY PRODUCTS
& SERVICES-- 0.7%
420,200 London International Group
Plc......................... 1,068,061
------------
LEISURE & TOURISM-- 2.2%
189,188 Compass Group Plc............. 1,999,685
52,500 Games Workshop Group Plc...... 603,361
153,300 London Clubs International.... 799,890
------------
3,402,936
------------
MACHINERY-- DIVERSIFIED-- 0.5%
134,050 Ashtead Group Plc............. 787,159
------------
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------
COMMON STOCKS-- CONTINUED
<S> <C> <C> <C>
UNITED KINGDOM-- CONTINUED
RETAILING & WHOLESALE-- 0.9%
154,600 Close Brothers Group Plc...... $ 1,296,902
150 Vendome Lux Group Plc......... 912
------------
1,297,814
------------
TELECOMMUNICATION SERVICES &
EQUIPMENT-- 0.7%
188,717 Vodafone Group Plc............ 1,029,015
------------
TRANSPORTATION-- 0.4%
57,400 British Airways Plc........... 560,483
------------
TOTAL UNITED KINGDOM.......... 22,123,458
------------
TOTAL COMMON STOCKS
(COST-- $97,221,491)........ 117,489,769
------------
PREFERRED STOCKS-- 2.3%
<S> <C> <C> <C>
BRAZIL-- 1.7%
AEROSPACE & DEFENSE-- 0.6%
65,162,053 Empresa Brasileira de
Aeronautica................. 880,688
------------
BANKS-- 0.2%
45,000,000 BCO Bradesco SA............... 334,709
------------
CHEMICAL & AGRICULTURAL
PRODUCTS-- 0.0%
3,420,000 Manah SA...................... 83,759
------------
DIVERSIFIED COMPANIES-- 0.7%
52,000 Vale Do Rio Doce Navegacao
SA.......................... 1,004,671
------------
INDUSTRIAL SPECIALTY PRODUCTS
& SERVICES-- 0.0%
7,800 * Cofap Cia Fab Peca............ 49,526
------------
REAL ESTATE-- 0.2%
106,000 Brazil Realty SA.............. 283,641
------------
TOTAL BRAZIL.................. 2,636,994
------------
GERMANY-- 0.6%
BUILDING, CONSTRUCTION &
FURNISHINGS-- 0.6%
3,000 Grohe Friedrich AG............ 885,835
------------
TOTAL PREFERRED STOCKS
(COST-- $4,142,003)........... 3,522,829
------------
</TABLE>
<PAGE>
PAGE 11
- ---------------------------------------------------------
SCHEDULE OF INVESTMENTS-- OCTOBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------
RIGHTS-- 0.0%
<S> <C> <C> <C>
BRAZIL-- 0.0%
METALS & MINING-- 0.0%
56,500 Compania Vale do Rio Doce
Navagacao SA................ $ 0
------------
TOTAL RIGHTS
(COST-- $0)................... 0
------------
</TABLE>
PRINCIPAL
AMOUNT
- ------------
REPURCHASE AGREEMENT-- 22.4%
UNITED STATES-- 22.4%
$33,980,000 Investment in repurchase
agreement, in a joint
trading account, purchased
10/31/97, 5.73% maturing
11/3/97, maturity value
$33,996,234 (a)............. 33,980,000
----------
TOTAL REPURCHASE AGREEMENT
(COST-- $33,980,000)........ 33,980,000
----------
VALUE
- ----------------------------------------------------------------
TOTAL INVESTMENTS--
(COST $135,343,494).................... 102.1% $154,992,598
FOREIGN CURRENCY HOLDINGS-- 0.5%
TOTAL FOREIGN CURRENCY
(COST $860,335)..... 824,109
------------
OTHER ASSETS AND
LIABILITIES-- NET...................... (2.6%) (4,010,597)
------ ------------
NET ASSETS............................... 100.0% $151,806,110
------ ------------
* Non-income producing securities
<TABLE>
<S> <C>
ADR American Depositary Receipts
ADS American Depositary Shares
GDR Global Depositary Receipts
GDS Global Depositary Shares
144a Securities that may be resold to "qualified institutional buyers" under Rule 144a of the Federal Securities Act of
1933. These securities have been determined to be liquid under guidelines established by the Board of Directors.
</TABLE>
(a) The repurchase agreement is fully collaterallized by U.S. government and/or
agency obligations based on market prices at October 31, 1997.
<PAGE>
PAGE 12
- ---------------------------------------------------------
KEYSTONE INTERNATIONAL FUND INC.
SCHEDULE OF INVESTMENTS-- OCTOBER 31, 1997
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
Foreign Currency Exchange Contracts to Sell:
<S> <C> <C> <C> <C>
UNREALIZED
EXCHANGE IN EXCHANGE U.S. VALUE AT APPRECIATION/
DATE CONTRACTS TO DELIVER FOR U.S. $ OCTOBER 31, 1997 (DEPRECIATION)
- --------------------------------------------------------------------------------------------------------------------------
01/08/98 4,311,531 Australian Dollar $3,127,800 $ 3,037,173 $ 90,627
11/05/97 356,423 Australian Dollar 253,203 250,655 2,548
11/04/97 2,891 Brazilian Real 2,624 2,623 1
10/31/97 266,288 Brazilian Real 241,466 241,542 (76)
11/03/97 28,272 British Pound 46,222 47,434 (1,212)
11/05/97 62,846 British Pound 104,953 105,440 (487)
11/19/97 3,088,675 British Pound 4,953,000 5,177,789 (224,789)
11/03/97 32,004,440 French Franc 5,200,000 5,549,354 (349,354)
02/03/98 31,059,950 French Franc 5,437,000 5,414,256 22,744
11/03/97 7,300,969 French Franc 1,229,634 1,265,716 (36,082)
11/24/97 6,371,700 German Mark 3,457,000 3,701,521 (244,521)
11/03/97 1,731,926,240 Italian Lira 999,986 1,022,992 (23,006)
01/28/98 1,405,729,688 Japanese Yen 11,745,000 11,833,221 (88,221)
11/03/97 2,488,052 Mexican Peso 300,435 296,726 3,709
11/24/97 14,053,127 Netherlands Guilder 6,762,000 7,248,737 (486,737)
11/24/97 9,937,807 Swiss Franc 6,587,000 7,115,663 (528,663)
<CAPTION>
Foreign Currency Exchange Contracts to Buy:
CONTRACTS TO RECEIVE
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
11/03/97 285,173 Brazilian Real $ 258,613 $ 258,672 $ 59
11/06/97 113,767 British Pound 189,993 190,874 881
11/03/97 81,065 British Pound 132,532 136,006 3,474
11/04/97 72,221 British Pound 120,219 121,169 950
11/05/97 1,020,576 British Pound 1,703,036 1,712,273 9,237
11/03/97 2,207,940 Canadian Dollar 1,575,524 1,566,637 (8,887)
11/03/97 32,004,440 French Franc 5,572,774 5,549,354 (23,420)
11/24/97 6,371,770 German Mark 3,561,239 3,701,521 140,282
11/24/97 14,053,127 Netherlands Guilder 6,972,267 7,248,737 276,470
11/03/97 1,492,283 Netherlands Guilder 764,607 768,623 4,016
11/03/97 148,810,155 Spanish Peseta 1,018,550 1,022,961 4,411
11/03/97 27,795,796 Swedish Krona 3,703,094 3,711,104 8,010
11/24/97 9,937,807 Swiss Franc 6,747,789 7,115,663 367,874
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 13
- ---------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, ONE MONTH
-------------------------------- ENDED
1997 1996 1995 OCTOBER 31, 1994 (C)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE BEGINNING OF YEAR $ 7.69 $ 7.11 $ 7.77 $ 7.67
- --------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.05) (0.02) 0.07 0
Net realized and unrealized gain (loss) on investments, futures and
foreign currency related transactions 1.27 0.75 0.05 0.10
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.22 0.73 0.12 0.10
- --------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income 0 (0.09) (0.04) 0
In excess of net investment income (0.10) (0.01) 0 0
Net realized gains on investments, futures and foreign currency
related transactions (0.16) (0.05) (0.74) 0
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.26) (0.15) (0.78) 0
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE END OF YEAR $ 8.65 $ 7.69 $ 7.11 $ 7.77
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(A) 15.69% 10.47% 2.19% 1.30%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 2.39% 2.43% 2.57% 2.52%(b)
Total expenses excluding indirectly paid expenses 2.38% 2.42% 2.58% N/A
Net investment income (loss) (0.49%) (0.21%) 0.88% (0.20%)(b)
PORTFOLIO TURNOVER RATE 101% 52% 76% 2%
AVERAGE COMMISSION RATE PAID PER SHARE $ 0.0010 $ 0.0011 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS END OF YEAR (THOUSANDS) $151,806 $147,911 $128,674 $157,929
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1994 (C) 1993 (C) 1992 (C) 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE BEGINNING OF YEAR $ 7.08 $ 6.01 $ 5.91 $ 5.35 $ 7.51 $ 6.66 $ 9.53
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0 (0.03) (0.01 ) (0.01) (0.07) (0.14) 0.03
Net realized and unrealized gain (loss) on
investments, futures and foreign currency
related transactions 0.62 1.14 0.34 0.83 (1.74) 1.06 (1.60)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.62 1.11 0.33 0.82 (1.81) 0.92 (1.57)
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.02) 0 0 0 0 (0.07) (0.08)
In excess of net investment income (0.01) (0.04) (0.23 ) (0.03) 0 0 0
Net realized gains on investments, futures and
foreign currency related transactions 0 0 0 (0.23) (0.35) 0 (1.22)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.03) (0.04) (0.23 ) (0.26) (0.35) (0.07) (1.30)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE END OF YEAR $ 7.67 $ 7.08 $ 6.01 $ 5.91 $ 5.35 $ 7.51 $ 6.66
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(A) 8.75% 18.59% 5.78% 15.59% (25.12%) 13.55% (15.55%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses 2.54% 2.94% 3.41% 3.14% 2.92% 2.65% 2.04%
Total expenses excluding indirectly paid
expenses N/A N/A N/A N/A N/A N/A N/A
Net investment income (loss) 0.01% (0.46%) (0.09%) (0.07%) (0.51%) (0.79%) 0.33%
PORTFOLIO TURNOVER RATE 121% 68% 74% 85% 42% 42% 60%
AVERAGE COMMISSION RATE PAID PER SHARE N/A N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS END OF YEAR (THOUSANDS) $154,529 $111,752 $64,135 $72,923 $73,768 $121,047 $115,712
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding applicable sales charges.
(b) Annualized.
(c) Calculation based on average shares outstanding.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 14
- ---------------------------------------------------------
KEYSTONE INTERNATIONAL FUND INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------
ASSETS:
Investments at market value (identified
cost--$135,343,494) $154,992,598
Foreign currency holdings (identified
cost--$860,335) 824,109
- ------------------------------------------------------------
Total investments and foreign currency
holdings (identified
cost--$136,203,829) 155,816,707
- ------------------------------------------------------------
Cash 71,909
Receivable for investments sold 9,906,396
Unrealized appreciation on open forward
foreign currency exchange contracts 935,293
Receivable for Fund shares sold 748,359
Interest and dividends receivable 364,074
Receivable for foreign tax witheld 126,033
Prepaid expenses 38,407
- ------------------------------------------------------------
Total assets 168,007,178
- ------------------------------------------------------------
LIABILITIES:
Payable for investments purchased 13,473,934
Unrealized depreciation on open forward
foreign currency exchange contracts 2,015,455
Payable for Fund shares redeemed 309,031
Due to related parties 106,615
Payable for foreign taxes withheld 41,383
Other accrued expenses 254,650
- ------------------------------------------------------------
Total liabilities 16,201,068
- ------------------------------------------------------------
NET ASSETS $151,806,110
- ------------------------------------------------------------
NET ASSETS REPRESENTED BY
Paid-in capital $101,381,366
Undistributed net investment income 6,805,770
Accumulated net realized gains on
investments, futures and foreign currency
related transactions 25,051,153
Net unrealized appreciation (depreciation)
on investments, futures and foreign
currency related transactions 18,567,821
- ------------------------------------------------------------
Total net assets $151,806,110
- ------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PRICE PER
SHARE
Net assets of $151,806,110417,547,613
shares outstanding $ 8.65
- ------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign
withholding taxes of $324,155) $ 2,473,326
Interest 536,696
- -------------------------------------------------------------
Total income 3,010,022
- -------------------------------------------------------------
EXPENSES
Distribution Plan expenses $1,597,729
Management fee 1,194,384
Transfer agent fees 556,157
Custodian fees 276,146
Administrative service fee 27,681
Directors fees 16,656
Miscellaneous expenses 140,973
- -------------------------------------------------------------
Total expenses 3,809,726
Less: Expenses paid indirectly (12,908)
- -------------------------------------------------------------
Net expenses 3,796,818
- -------------------------------------------------------------
Net investment loss (786,796)
- -------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY RELATED
TRANSACTIONS
Realized gain (loss) on:
Investments and futures 33,504,191
Foreign currency related
transactions (424,873)
- -------------------------------------------------------------
Net realized gain on
investments, futures and
foreign currency related
transactions 33,079,318
- -------------------------------------------------------------
Net change in unrealized
appreciation (depreciation)
on:
Investments and futures (7,060,342)
Foreign currency related
transactions (1,325,400)
- -------------------------------------------------------------
Net change in unrealized
appreciation (depreciation) on
investments, futures and
foreign currency related
transactions (8,385,742)
- -------------------------------------------------------------
Net realized and unrealized gain
on investments, futures and
foreign currency related
transactions 24,693,576
- -------------------------------------------------------------
Net increase in net assets
resulting from operations $ 23,906,780
- -------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 15
- ---------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
1997 1996
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment loss $ (786,796) $ (304,691)
Net realized gain on investments, futures and foreign currency related transactions 33,079,318 4,704,866
Net change in unrealized appreciation (depreciation) on investments, futures and
foreign currency related transactions (8,385,742) 9,450,694
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 23,906,780 13,850,869
- ----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income (1,828,737) (1,681,273)
In excess of net investment income 0 (117,517)
Net realized gains on investments, futures and foreign currency related transactions (2,926,339) (894,973)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (4,755,076) (2,693,763)
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 159,178,048 216,278,164
Payments for shares redeemed (178,656,491) (210,495,769)
Net asset value of shares issued in reinvestment of distributions 4,222,295 2,297,398
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from capital share transactions (15,256,148) 8,079,793
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 3,895,556 19,236,899
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of year 147,910,554 128,673,655
- ----------------------------------------------------------------------------------------------------------------------
End of year [including undistributed net investment income and accumulated net
investment loss of $6,805,770 and ($129,662), respectively.] $151,806,110 $147,910,554
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 16
- ---------------------------------------------------------
KEYSTONE INTERNATIONAL FUND INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Keystone International Fund Inc., (the "Fund") is a Massachusetts business trust
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a diversified, open-end management investment company. The Fund's
primary investment objective is long term growth of capital. As a secondary
objective, the Fund seeks modest income from its investments.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Actual results could differ from these estimates.
A. VALUATION OF SECURITIES
The Fund values investments traded on an established exchange on the basis of
the last sales price on the exchange where primarily traded. The Fund values
securities traded in the over-the-counter market at the mean between the bid and
asked prices. Securities, for which market quotations are not readily available,
including restricted securities, are valued at fair value as determined in good
faith according to procedures established by the Board of Directors.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value.
B. REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. Securities pledged as collateral
for repurchase agreements are held by the custodian on the Fund's behalf. The
Fund monitors the adequacy of the collateral daily and will require the seller
to provide additional collateral in the event the market value of the securities
pledged falls below the carrying value of the repurchase agreement, including
accrued interest. The Fund will only enter into repurchase agreements with banks
and other financial institutions which are deemed by the investment advisor to
be creditworthy pursuant to guidelines established by the Board of Directors.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund, along with certain other funds managed by Keystone
Investment Management Company ("Keystone"), may transfer uninvested cash
balances into a joint trading account. These balances are invested in one or
more repurchase agreements that are fully collateralized by U.S. Treasury and/or
federal agency obligations.
C. FOREIGN CURRENCY
The books and records of the Fund are maintained in United States ("U.S.")
dollars. Foreign currency amounts are translated into U.S. dollars as follows:
market value of investments, assets and liabilities at the daily rate of
exchange; purchases and sales of investments, income and expenses at the rate of
exchange prevailing on the respective dates of such transactions. Net unrealized
foreign exchange gain (loss) resulting from changes in foreign currency exchange
rates is a component of net unrealized appreciation (depreciation) on
investments and foreign currency related transactions. Net realized foreign
currency gains and losses resulting from changes in exchange rates include
foreign currency gains and losses between trade date and settlement date on
investment securities transactions, foreign currency related transactions and
the difference between the amounts of interest and dividends recorded on the
books of the Fund and the amount actually received and is included in realized
gain (loss) on foreign currency related transactions. The portion of foreign
currency gains and losses related to fluctuations in exchange rates between the
initial purchase trade date and subsequent sale trade
<PAGE>
PAGE 17
- ---------------------------------------------------------
date is included in realized gain (loss) on foreign currency related
transactions.
D. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to settle portfolio purchases and sales of securities denominated in
a foreign currency and to hedge certain foreign currency assets or liabilities.
Forward contracts are recorded at the forward rate and are marked-to-market
daily. Realized gains and losses arising from such transactions are included in
net realized gain (loss) on foreign currency related transactions. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract and is subject to the credit risk that the other
party will not fulfill their obligations under the contract. Forward contracts
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
E. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premiums. Dividend income is recorded on the
ex-dividend date or in the case of some foreign securities, on the date
thereafter when the Fund is made aware of the dividend. Foreign income may be
subject to foreign withholding taxes which are accrued as applicable. Capital
gains realized on some foreign securities are subject to foreign taxes which are
accrued as applicable.
F. FEDERAL TAXES
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund will not incur any federal income tax liability since it
is expected to distribute all of its net investment company taxable income and
net taxable capital gains, if any, to its shareholders. The Fund also intends to
avoid any excise tax liability by making the required distributions under the
Code. Accordingly, no provision for federal taxes is required.
G. DISTRIBUTIONS
The Fund distributes net investment income and net capital gains, if any, at
least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The significant differences between financial statement
amounts available for distributions and distributions made in accordance with
income tax regulations are primarily due to differing treatment of foreign
currency gains(losses) generated by the Fund.
H. FUTURES CONTRACTS
In order to gain exposure to or protect against changes in security values, the
Funds may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the value
of the contract changes. Such changes are recorded as unrealized gains or
losses. Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other party
will not fulfill their obligations under the contract. Futures contracts also
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
3. CAPITAL SHARE TRANSACTIONS
The Fund has an unlimited number of shares of beneficial interest with a par
value of $1.00 authorized. Transactions in shares of the Fund were as follows:
<PAGE>
PAGE 18
- ---------------------------------------------------------
KEYSTONE INTERNATIONAL FUND INC.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
1997 1996
<S> <C> <C>
- ---------------------------------------------------------
Shares sold 18,930,328 28,960,907
Shares redeemed (21,092,806) (28,130,870)
Shares issued in
reinvestment
of distributions 463,479 327,732
- ---------------------------------------------------------
Net increase (decrease) (1,698,999) 1,157,769
- ---------------------------------------------------------
</TABLE>
4. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities and foreign currencies) for the year ended October 31,
1997 were $148,772,633 and $185,000,221, respectively. On October 31, 1997, the
cost of investments for federal income tax purposes was $136,487,018, gross
unrealized appreciation of investments was $22,578,473 and gross unrealized
depreciation of investments was $4,072,893 resulting in net unrealized
appreciation of $18,505,580 for federal income tax purposes.
5. DISTRIBUTION PLAN
Evergreen Distributors, Inc. ("EDI"), formerly Evergreen Keystone Distributors,
Inc., a wholly-owned subsidiary of The BISYS Group, Inc. ("BISYS") serves as
principal underwriter to the Fund. Prior to December 11, 1996, Evergreen
Investment Services, Inc. ("EIS"), formerly Evergreen Keystone Investment
Services, Inc. ("EKIS"), a wholly-owned subsidiary of Keystone, served as the
Fund's principal underwriter.
The Fund has adopted a Distribution Plan, as allowed by Rule 12b-1 of the 1940
Act. The Distribution Plan permits the Fund to reimburse its principal
underwriter for costs related to selling shares of the Fund and for various
other services. These costs, which consist primarily of commissions and services
fees to broker-dealers who sell shares of the fund, are paid by shareholders
through expenses called "Distribution Plan expenses". Under the Distribution
Plan, the Fund pays a distribution fee which may not exceed 1.00% of the Fund's
average daily net assets. Distribution Plan expenses are calculated daily and
paid monthly.
EDI intends to seek full payment of such distribution costs from the Fund at
such time in the future as, and to the extent that, payments thereof by the Fund
would be within permitted limits.
The Distribution Plan may be terminated at any time by vote of the Independent
Trustees or by vote of a majority of the outstanding voting shares. However,
after the termination of the Distribution Plan, and subject to the discretion of
the Independent Directors, payments to EIS and/or EDI may continue as
compensation for services which had been provided while the Distribution Plan
was in effect.
6. INVESTMENT ADVISORY AGREEMENT AND
OTHER AFFILIATED TRANSACTIONS
Keystone, a subsidiary of First Union Corporation ("First Union"), is the
investment advisor for the Fund. In return for providing investment management
and administrative services to the Fund, the Fund pays Keystone a management
fee, calculated daily and paid monthly, by applying percentage rates which start
at 0.75% and decline, as net assets increase, to 0.45% per annum, to the net
asset value of the shares of the Fund.
During the year ended October 31, 1997, the Fund paid or accrued $27,681 to
Keystone for certain administrative services.
Evergreen Service Company ("ESC"), formerly Evergreen Keystone Service Company
("EKSC"), a wholly-owned subsidiary of Keystone, serves as the transfer and
dividend disbursing agent for the Fund.
BISYS Fund Services, Inc., an affiliate of EDI, serves as the Fund's
sub-administrator. As sub-administrator, BISYS Fund Services, Inc. provides the
officers of the Fund. For this service, BISYS Fund Services, Inc. is paid a fee
by Keystone, which is not a Fund expense. Officers of the Fund and affiliated
Directors receive no compensation directly from the Fund.
<PAGE>
PAGE 19
- ---------------------------------------------------------
7. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. The
assets deposited with the custodian under this expense offset arrangement could
have been invested in income-producing assets.
8. DISTRIBUTION TO SHAREHOLDERS
A capital gain distribution of $1.54 per share was declared on November 20, 1997
and payable on November 24, 1997 to shareholders of record November 20, 1997.
This distribution is comprised of long-term capital gains of $1.36 and
short-term capital gains of $0.18 per share. A distribution from net investment
income of $0.33 was declared on November 20, 1997 and payable on November 24,
1997 to shareholders of record November 20, 1997. These distributions are not
reflected in the accompanying financial statements.
FEDERAL TAX STATUS-- FISCAL 1997
DISTRIBUTIONS (UNAUDITED)
For the fiscal year ended October 31, 1997 a dividend of $0.10 per share was
paid. This dividend is taxable to shareholders as ordinary income and 3% is
eligible for the corporate dividend received deduction.
In January 1998 we will send you complete information on the distributions
paid during the calendar year to help you in completing your federal tax return.
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PAGE 20 64088E
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INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
KEYSTONE INTERNATIONAL FUND INC.
We have audited the accompanying statement of assets and liabilities of Keystone
International Fund Inc., including the schedule of investments, as of October
31, 1997, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended and the financial highlights for each of the periods presented
herein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone International Fund Inc. as of October 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended and financial highlights for the
periods specified in the first paragraph above in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
November 26, 1997
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This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Evergreen Funds, contact your
financial adviser or call Evergreen Funds.
NOT
FDIC MAY LOSE VALUE
INSURED NO BANK GUARANTEE
EVERGREEN DISTRIBUTOR, INC.
Evergreen is a Service Mark of Evergreen
Investment Services, Inc. Copyright 1997.
542303 (Recycle logo appears here)
KEYSTONE
(Photo appears here)
INTERNATIONAL
FUND INC.
(Evergreen Funds logo appears here)
Evergreen Funds (SM)
Since 1942
ANNUAL REPORT
OCTOBER 31, 1997
